Over the past 3 years, the governments of many Caribbean countries, popularly used as offshore holding jurisdictions, have come under increasing pressure to overhaul their tax codes. In 2016, the UK government initiated legislation to force such territories under their control to set up public registers by 2020, while the European Union (EU) has recently been expanding its list of non-cooperative tax jurisdictions, bringing an end to the widespread viability of tax havens. The British Virgin Islands (BVI) has avoided the EU blacklist by implementing significant changes with implications for all current and future financial arrangements.
In response to requirements set out by the EU Code of Conduct Group, the government of the BVI has enacted extensive legislation, significantly affecting all financial holdings and enterprises registered in the territory. The new law, entitled the ‘Economic Substance (Companies and Limited Partnerships) Act 2018’ (Economic Substance Act), brings BVI laws closer in line with OECD standards and enhances compliance through the international C.R.S (Common Reporting Standard). It also creates obligations for registered entities to demonstrate a certain degree of economic substance, in terms of physical presence, operational activity and disclosure.
In addition to staying current with EU protocols, the legislation also indicates an evolution of the BVI’s corporate financial services industry as it pivots toward servicing potential new investments through privatized public resources from governments such as Saudi Arabia, Kazakhstan, Abu Dhabi, Iran and Singapore. The measures therefore intend to preserve the interests of a majority of existing financial arrangements while providing for a shifting economic landscape. However, all parties with BVI interests should be advised of new obligations and potential liabilities moving forward.
The new laws affect business operations designated as ‘relevant activities’, defined as any activity through which an entity receives income during any financial period. This category includes banking, insurance, shipping, fund management, finance and leasing, headquarters, holding, intellectual property, and distribution & service centres. Investment funds do not fall under the relevant activity category and will not face economic substance obligations. However, holding business entities, with any assets other than equity participation, do.
All such activity must be managed and directed within the BVI, along with demonstrable employed staff, business expenditures, offices and board meetings, involving a minimum number of directors. These requirements, the ‘Economic Substance Test’, will be assessed in yearly reporting periods. Holding business entities will face reduced scrutiny while Intellectual Property holdings will be subject to more rigorous assessment. New entities, incorporated after January 1st, 2019 will have until 12 months from their date of incorporation to meet the economic substance requirements, while existing entities will have 12 months from June 30th 2019.
Entities conducting relevant activities (other than those that solely function as holding businesses) are also required to carry out (or outsource) Core Income Generating Activities (CIGA) within the BVI. For example, insurance and fund management businesses may perform some of their risk assessments locally to meet this requirement, and banking businesses can do so through fundraising activity. It will not be necessary to conduct all such activities within the BVI but there must be demonstrable domestic activity contributing towards revenue.
Intellectual property holdings in particular will face considerable challenges under the new requirements because, in addition to further scrutiny, Intellectual property held without Research and Development, marketing and distribution arrangements within the BVI will most likely face compliance issues. Intellectual property holdings will be integrated into the updated Beneficial Ownership Secure Search system (B.O.S.S) law, originally enacted in 2017. The B.O.S.S has been likened to the facilities of a hotel, with the entrance and lobby accessible to the public, while individual rooms guarantee the client privacy in all circumstances except when there is strong reason to believe laws are being violated. With new amendments, the system now provides information on parent entities, turnover, expenditure, employees, addresses, equipment and management, in addition to any intellectual property holdings. All relevant activities and economic substance information will be integrated into the system.
Noncompliance will result in penalties incurred through a graduated notice process, starting with small fines that increase as long as the issue remains unresolved. High risk Intellectual Property holdings face a maximum penalty of 400,000 USD, while all other holdings face up to 200,000 USD. Noncompliance does not constitute a criminal offence, although continued unresolved compliance issues could eventually lead to being removed from the registry. The biggest area of potential pitfall is failure to provide information regarding any BVI holding. All companies must report to the International Tax Authority and any breach of conditions, illicit I.P holdings or false tax residency claims will result in automatic notification.
All companies with holdings or financial arrangements set up through the BVI should commence planning out their compliance strategies. This includes confirming that their commercial entities fall within the scope of the Economic Substance Act, properly categorizing structures to identify relevant activities, staying updated with criteria for economic substance tests, and considering changes to their operations and structuring.
The Economic Substance Act presents both challenges and opportunities; it future-proofs financial arrangements in the BVI by ensuring that beneficiaries will not find themselves filing taxes in a blacklisted jurisdiction. In many cases, taking steps to comply with BVI’s Economic Substance assessments could a prudent fiscal decision.
In light of the constant international pressures surrounding the region, however, many may find it beneficial to shift to a different kind of strategy altogether, registering in “mid shore” jurisdictions such Luxembourg, Malta, Singapore and Hong Kong in order to take advantage of their fair taxation rates, global banking and international reputation for transparency.
The ideal course of action varies depending on the individuating circumstances that surround companies and governments. This is where our expertise, experience and international reach can help you take your next step in a changing global landscape. Stay ahead of the curve by contacting us for a consultation today.
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